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Rushed Zim Dollar introduction cost the economy

22 Sep 2020 at 18:17hrs | Views
The Zimbabwean government recently gazetted the Finance Bill (H.B.4 of 2020) which validates the fiscal changes that were tabled in the Mid-Term budget review in July 2020. The Bill amends the Gains Tax Act (Chapter 23:01), the Finance Act (Chapter 23:04) and the Income Tax Act (Chapter 23:06). The Bill also carries changes to various tax heads such as mining royalties, income tax, value-added tax, customs and excise duties. Of significance is the fact that the government is reverting back to the taxation model of the Finance Act of 2009 which allows it to collect taxes in foreign currency from corporates and individuals that earn their income in foreign currency. The individual income tax free threshold has been raised from ZW$5,000 to ZW$25,000 (US$302) and aligns to the foreign currency tax free threshold of US$350. The individual income tax bands will be as follows: From US$351 to US$1,500 (20%), US$1,501 to US$5,000 (25%), US$5,001 to US$10,000 (30%), US$10,001 to US$15,000 (35%) and above US$15,000 (40%). The changes are with effect from 1 August 2020.

Zimbabwe officially dollarized on the 9th of April in 2009 and adopted a basket of multiple currencies led by the United States Dollar and South African Rand. The market had rejected the Zimbabwean Dollar and started using foreign currencies after record hyperinflation eclipsed 250 million (Officially) in July 2008. However, the Zim Dollar was hurriedly re-introduced in February 2019 to thwart pressure from civil servants who were demanding to be paid in US Dollars. Statutory Instrument (SI) 142 of 2019 was then gazetted in June 2019 to ban the use of multiple currencies and enforce the use of a monocurrency regime in the economy. However the local currency experienced a record free fall, losing 90% of its value in 2019. Annual inflation increased from 59% in February 2019 to 761% in August 2020.

In July 2020, a dual pricing regulation (SI 185 of 2020) directed all sellers of various goods and services to display and quote prices in both the Zim Dollar and US Dollar using the auction rate. This paved the way for the government to follow businesses and labour with new US Dollar tax proposals. The economy is now heavily skewed towards official dollarization again, with the government now amending its taxation arsenal and partially remunerating in US Dollar. Most businesses have also moved to charge in foreign currency and will be more than happy to trade in a stable currency form planning purposes.

Impact on tax revenues & service delivery
The revenue performance for 2019 looked rosy on face value despite regressing in real terms. The country's tax and non-tax revenue jumped to ZW$22,971 billion (US$2,691 billion using monthly interbank rates). In spite of surpassing gross and net revenue targets every month, tax revenues fell below the 2013 total net-of-refunds collections of US$3,430 billion. This means that the Zimbabwean Dollar depreciation and the subsequent general economic contraction have seriously hit government pockets, thereby adversely impacting public service delivery and infrastructure spending. Service delivery in hospitals, education, housing, social welfare and policing have been seriously affected due to compensation related industrial action and limited budget allocations. Inflation still poses the greatest risk to revenue collection, utilization of allocated budgets and service delivery in various government departments.

ZSE & pension funds losses
In December 2013, the Zimbabwe Stock Exchange (ZSE) market capitalization reached US$4,2 billion. As of September 14, 2020 the combined market capitalization was ZW$217,44 billion (less than US$2,630 billion). After pouring millions of capital into new production lines and ramping up production, all counters on the ZSE have seen their values eroded by more than 50% as a result of exchange rate losses. The same can be said of the pensions and insurance sector where pension and investment values were severely battered. The value of pension and insurance assets has plummeted from a value of US$4,358 billion in December 2013 to about US$2,013 billion in December 2019. There has been an increase in product termination of policies as premiums, contributions and benefits can no longer keep pace with the rate of inflation. For the second time in a decade, pensioners have lost their life savings due currency changes and most are struggling to make ends meet.

Increase in poverty levels
Poverty levels in Zimbabwe spiked in 2019 as access to food, basic education, health care, decent housing, electricity, power, transport, safe drinking water and other insurance became elusive to many Zimbabweans as a result of loss of income. Salaries and wages in both the private and public sector are not being adjusted in line with changes in inflation rate or consumer price indices. Civil servants are currently getting a COVID-19 allowance of US$75 plus a basic salary ZW$3,000 for the least paid worker (Below the Zimstat Poverty Datum Line of ZW$17,144 for August 2020).

The same can be said for the private sector where salaries average just below that amount for the least paid worker. This means that the Zimbabwean Dollar has decimated incomes for labour and most are now living in extreme poverty if compared to 2010 to 1018 income levels or World Bank standards on poverty. The impact is being felt on decline in consumer confidence and spending in the economy. According to the World Bank, extreme poverty reached 40% of the population in 2019, up from 33.4% in 2017, with urban poverty rising faster (from 4% to 10%) than rural poverty.

Corporate Sector losses

Zimbabwe's corporate sector has been hard hit by the rushed introduction of the local currency. Businesses have lost billions through erosion of asset value, exchange rate losses, foreign debt overhang and decline in revenue as a result diminished consumer spending. British American Tobacco (BAT) Zimbabwe posted a loss of ZW$27,69 million in 2019. Financial behemoth, Old Mutual Zimbabwe suffered a massive loss of ZW$2,61 billion while telecoms giant Econet Wireless Zimbabwe posted a heavy loss of ZW$1,28 billion in 2019. Listed entities such as Simbisa Brands, Nampak, Pretoria Portland Cement, National Foods, Delta Beverages and RioZim experienced their worst trading period in 2019 characterized by production stoppages and failure to meet foreign obligations. The business sector has blamed their losses on currency depreciation, foreign exchange losses and decline in consumer disposable incomes. After introducing the Zimbabwean Dollar, the government took over foreign debts amounting to about US$2 billion. Most of the debt has not yet been paid and this has had a negative impact on local businesses in terms of importing raw materials, getting new credit lines, outsourcing critical foreign services, debt to equity ratio, cash flow management and business stability.

The country's de-dollarization plan was doomed from the onset as the country did not meet the basic fundamentals required to bring stability to a mono currency. The country was not actively implementing any macroeconomic stabilization plan that would lead to low inflation or have an efficient foreign exchange market to talk of. Further the country has no foreign currency reserves or external facilities to back the stability of the domestic currency, an acceptable sovereign debt repayment plan or the governance discipline required to curb rampant money supply growth. The rushed introduction of the Zimbabwean Dollar has not only left labour, business and the economy nursing wounds of inflation but it has also battered the government in terms of tax revenue collections and service delivery. The government is now covertly undoing the mono currency legislation and exchange controls but economic output lost due to the ill-timed currency changes can never be recovered. Undeniably, every country needs a domestic currency to push its export and economic growth agenda. However that currency borrows its stability for a stable economic and political climate. The currency changes were reactionary, mistimed and lacked alignment to other economic policies and reforms.  

Victor Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email or Twitter @VictorBhoroma1.

Source - Victor Bhoroma
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